We had a good client ask us the other day about the status of case we had filed together about two years ago. I thought the question was a very good one, so with names omitted I’d like to share both the question and my answer. First some background: the whistleblower client is not an insider of the taxpayer, so we have no visibility into what the IRS is currently doing with the case after two years – other than that the claim is still open with the Whistleblower Office – because the IRS is prohibited from telling us those “confidential taxpayer information” details pursuant to section 6103.

 

Question:

If you had to make an educated guess, where do you think things are in the process?

 

My Answer:

By the Submission + 2 year date the IRS has had more than adequate time to evaluate a claim and determine whether or not they want to use the information in an audit of the taxpayer. If they decide not to use it after that evaluation, which averages a just under year in duration from the Submission date, then the claim is typically rejected within a couple months. We obviously did not get a claim rejection in that timeframe, which makes us believe they made a decision to use the information . When they decide to use the information, from that point they have to either add the issue/information to an existing audit, or schedule a new audit of the taxpayer. When that audit actually commences is highly variable depending on the taxpayer, when their last return was filed, what the applicable periods of limitations are, how busy the agents are who would do the case, etc. Figure it will take at least a couple months for them to start a new audit, probably more though.

 

IRS Audits – once they have commenced – regularly take a year or two, and I’ve seen some take much longer. Note that most business audits cover multiple years, so they have a lot of ground to cover and that’s also how the IRS stays “current” … meaning that they get audits done before the section 6501 statute of limitations expires. If they don’t get the audit done before the statute is set to expire for one or more of the years, then they will ask the taxpayer for an extension of the statute on a Form 870. I put “current” in quotes because in practice these extensions happen all the time. In my prior job representing Fortune 500 taxpayers I’d regularly be working on an audit for a year for which the return was filed more than 3 years prior (that’s the end of the normal section 6501 assessment statute of limitations). If and when I took those taxpayers to IRS Appeals or litigation, we were then usually 3-6 years out from when the return was filed. The moral of the story is that tax cases can be a long road, and even at the Submission +2 year date we’re probably still closer to the beginning then we are to the end.